AMC Networks Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The filing is for AMC Networks Inc. and subsidiaries; financial statements are unaudited and prepared under U.S. GAAP. Comparisons are with the corresponding 2013 periods. Results include Chellomedia from its January 31, 2014 acquisition date.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $519.6 million | $395.3 million | $1,566.2 million | $1,156.6 million |
| Operating income | $110.2 million | $122.4 million | $387.3 million | $497.2 million |
| Net income attributable to AMC shareholders | $53.2 million | $58.1 million | $183.2 million | $255.4 million |
| Diluted EPS | $0.73 | $0.80 | $2.52 | $3.51 |
| Adjusted operating cash flow (AOCF, non-GAAP) | $141.9 million | $137.4 million | $465.9 million | $425.9 million |
- Q3 revenue rose 31.4%, while operating income declined 9.9% and shareholder net income declined 8.5%. Operating margin was 21.2%, versus 31.0%.
- Nine-month revenue rose 35.4%; operating income fell 22.1% and shareholder net income fell 28.3%. Operating margin was 24.7%, versus 43.0%.
- Nine-month AOCF increased 9.4%. Prior-year operating income and AOCF included a $132.9 million one-time DISH Network litigation settlement gain; AOCF excludes that gain by definition.
- Q3 National Networks revenue increased 4.3%, but segment AOCF declined 14.5% to $128.6 million. Q3 International and Other revenue was $122.7 million, largely reflecting Chellomedia; segment AOCF was $12.9 million.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $261.8 million, compared with cash used of $74.1 million in 2013. Program-rights payments were $510.4 million. Investing cash use was $1,052.1 million, mainly the $1,024.4 million net acquisition outlay; financing provided $577.8 million.
- Cash was $296.6 million at September 30, down from $522.0 million at year-end 2013. Capital expenditures were $24.3 million for the nine months.
- Debt carrying value, excluding capital leases, was $2,759.0 million, including $55.5 million current; capital lease obligations totaled $31.1 million. Debt was $2,157.2 million at year-end 2013. The company borrowed an additional $600 million under its Term Loan A Facility to help fund Chellomedia.
- The $500 million revolving facility was undrawn, and the company reported compliance with debt covenants. Management said cash, operating cash flow and revolver availability should cover needs over the next 12 months and longer term, but it does not expect operating cash flow alone to repay all debt at maturity and will depend on capital-market access to refinance or repay.
- Total liabilities were $4,051.3 million and stockholders’ deficiency was $388.0 million. Cash and debt levels indicate substantial leverage; the filing does not provide a net-debt measure.
Material changes, outlook and risks
- The Chellomedia acquisition expanded international operations and materially affects year-over-year comparability. Preliminary purchase accounting included $524.5 million of goodwill; acquired-business valuation and tax allocations remained subject to revision.
- National Networks revenue growth reflected higher distribution revenue and nine-month advertising growth, but Q3 advertising declined 5.8%, partly because AMC aired fewer scripted series, including no Breaking Bad season in the comparable quarter. Management expects advertising and distribution revenue, and AOCF, to vary by quarter.
- Programming costs increased with investment in original content and acquired international operations. Management expected program-rights expense to increase for full-year 2014 versus the prior year. Programming write-offs were $16.5 million for the first nine months, including charges tied to unscripted series and pilots.
- Management expected an effective tax rate of approximately 33% for full-year 2014. Restructuring charges were $6.8 million for the nine months; the plan was expected to be substantially completed in 2014.
- Atmedia, Chellomedia’s advertising-sales unit, was sold in September and reported as discontinued operations; it generated a $3.4 million nine-month net loss.
- In October 2014, a subsidiary agreed to acquire 49.9% of BBC AMERICA for $200 million. AMC Networks stated it would have operational control and consolidate the venture after closing; the price was subject to adjustments.
- Key disclosed risks include substantial debt and refinancing needs; competition and distributor bargaining power; audience, advertising and subscriber variability; rising programming costs and possible content write-offs; international execution and foreign-exchange exposure; and acquisition integration and valuation uncertainty. The company reported $14.3 million of foreign-currency transaction losses for the nine months and a $42.1 million currency-translation loss in other comprehensive income.
- Management reported effective disclosure controls. Chellomedia integration was ongoing, with management continuing to evaluate internal controls. No material developments in legal proceedings were reported.
Important facts for investors to verify
- How much reported growth and future profitability depend on Chellomedia, and the final purchase-price allocation and goodwill valuation.
- Whether National Networks can restore segment AOCF margins as programming investment and content costs rise.
- Debt maturities, covenant capacity, refinancing access and the effect of variable rates and foreign-exchange movements on cash flows.
- BBC AMERICA transaction closing, purchase-price adjustments, put rights and the venture’s subsequent consolidated results.
- Cash conversion after program-rights payments, and the sustainability of management’s liquidity and full-year tax-rate expectations.